Trusts play a key part in estate planning since they provide great advantages for specific situations. So, let’s talk about the difference between a testamentary trust and a revocable trust.
What Is a Trust?
A trust holds legal title to property for the benefit of another person (“beneficiary”). The person who creates the trust (“the grantor”) chooses a manager (sometimes themselves), known as “the trustee,” to manage the assets in order to protect them. Assets must be transferred into a trust for them to be owned by the trust. For example, if you want to put a house in the trust, a new deed in the name of the trust must be created and recorded at the county clerk’s office. One of the common reasons people use trusts is to ensure their assets are handled the way they want from the creation of the trust through the distribution of assets after the grantor dies.
This type of trust is created in the Last Will and Testament document. There’s no separate trust document. It only goes into effect after you die. The terms of the trust can be changed at any time since it doesn’t come into being until after death.
When you pass away, the will must go through probate and then the court establishes the testamentary trust using the terms outlined in the will. Once created, this trust is irrevocable. The executor follows the directions in the will to transfer property into the trust, which takes some time. Assets are distributed after probate of the will is completed.
So, why would you use a testamentary trust if you’re doing a will? A major benefit of a testamentary trust is that it gives the grantor control over the disbursement of their assets. This enables a grantor with a minor child or grandchild to have the assets remain in the trust until the child is older and able to manage their own funds.
A revocable trust (also known as a living trust) is created while you’re alive and takes immediate effect. It is its own document. Assets need to be transferred into the revocable trust for the trust to work as it was intended. When you put your assets in a Massachusetts revocable trust, you maintain ownership of the assets and have the flexibility to change what’s inside the trust after it’s created. You can also choose to end its existence. Quite often the grantor is the trustee, so that person can use or spent down the trust assets during their lifetime. This trust can be used to distribute property before death, at death, or afterwards.
Here are four differences between a testamentary trust and a revocable trust:
1. A revocable trust avoids probate.
The will with the testamentary trust in it goes through probate, which costs money and can take about 12-18 months. That means your estate will get smaller (due to fees and court costs) and beneficiaries will have to wait for their inheritance. A revocable trust doesn’t go through probate.
2. There’s more privacy with a revocable trust.
Since a will goes through probate, it gets filed and becomes public record. That means that anyone can go to the court where public records are kept and ask to see a copy A revocable trust has the advantage that it doesn’t become public knowledge.
3. Revocable trusts include incapacity planning.
As the grantor, even if you choose to be the trustee, you can name a successor trustee who would take over managing the trust if you become incapacitated and are unable to do it yourself. That means even if you become temporarily incapacitated, your successor trustee can manage your trust assets without needing to get the court involved.
4. Revocable trusts allow beneficiaries to receive distributions before the grantor passes away.
If the grantor wants to set up a staggered distribution of funds to his adult son, that can be outlined in the trust. Even if the grantor gets in an accident and slips into a coma, the successor trustee could continue to follow the trust’s instructions of distributing money to a beneficiary.
Whether a testamentary trust or a revocable trust would work best for you and your family really depends on your specific situation and goals. As an experienced Massachusetts estate planning attorney, I’ll get to know you and your needs and help you determine which trust would work best for you. Contact us today for your free, no-obligation consultation.